Wednesday, February 22, 2006

The Weakest Link and the War on Terror

In 2001, the Nobel Prize in Economics was awarded for research on asymmetric information. I didn't win this prize but I do see the relevance of this research for the current debate concerning the UAE purchasing port access in many of our major cities.

You don't have to be Joe Stiglitz to appreciate that these companies know that they have private information about what goes on in their business. Homeland Security will not be able to monitor them 24 hours a day 365 days a year. If terrorists can infiltrate the top ranks of these businesses then they could arrange to have dirty bombs delivered through such ports.

This raises an interesting risk counter-factual. What is the current probability that a dirty bomb could be delivered through such a port when the British control it (see below)? What is the increase in the probability of such a successful "import" if the UAE controls it? Economists think at the margin! Well, what is the marginal increase in the probability of this bad event?

Do we believe in the precautionary principal? How can the UAE guarantee that they will screen their employees? Do they have the right incentives to do a good job here? If the USA could make a credible threat to punish the UAE if a bad state of the world occurs, then the UAE would have the right incentives.

This raises the larger question of when does ownership rights affect economic outcomes? The coase theorem originally claimed that they didn't matter. Grossman and Hart might disagree!

Note the simple political economy below that politcians whose constituents live near these ports are going crazy to not give the UAE the benefit of the doubt. Who do you trust? What are the unintended consequences of the rest of the world thinking that the USA doesn't trust them?

The rational terrorist will search for the weakest link in our homeland security chain. The airports look pretty safe. This port option must look tempting.

Bush Unaware of Ports Deal Before Approval

By TED BRIDIS, Associated Press Writer1 hour, 2 minutes ago

President Bush was unaware of the pending sale of shipping operations at six major U.S. seaports to a state-owned business in the United Arab Emirates until the deal already had been approved by his administration, the White House said Wednesday.

Defending the deal anew, the administration also said that it should have briefed Congress sooner about the transaction, which has triggered a major political backlash among both Republicans and Democrats.

Bush on Tuesday brushed aside objections by leaders in the Senate and House that the $6.8 billion sale could raise risks of terrorism at American ports. In a forceful defense of his administration's earlier approval of the deal, he pledged to veto any bill Congress might approve to block the agreement involving the sale of a British company to the Arab firm.

Bush faces a rebellion from leaders of his own party, as well as from Democrats, about the deal that would put Dubai Ports in charge of major shipping operations in New York, New Jersey, Baltimore, New Orleans, Miami and Philadelphia.

While Bush has adamantly defended the deal, the White House acknowledged that he did not know about it until recently.

"He became aware of it over the last several days," McClellan said. Asked if Bush did not know about it until it was a done deal, McClellan said, "That's correct." He said the matter did not rise to the presidential level, but went through a congressionally-mandated review process and was determined not to pose a national security threat.

"The president made sure to check with all the Cabinet secretaries that are part of this process, or whose agencies or departments are part of this process," the spokesman said. "He made sure to check with them — even after this got more attention in the press, to make sure that they were comfortable with the decision that was made."

"And every one of the Cabinet secretaries expressed that they were comfortable with this transaction being approved," he said.

Commerce Secretary Carlos Guiterrez, told The Associated Press in an interview: "They are not in charge of security. We are not turning over the security of our ports. When people make statements like that you get an instant emotional reaction."

Treasury Secretary John Snow said failure to complete the transaction would send the wrong message overseas.

"The implications of failing to approve this would be to tell the world that investments in the United States from certain parts of the world aren't welcome," Snow told reporters Wednesday following a speech in Connecticut to a fuel cell manufacturer. "That sends a terrible message."

The sale's harshest critics were not appeased.

"I will fight harder than ever for this legislation, and if it is vetoed I will fight as hard as I can to override it," said Rep. Pete King, R-N.Y., chairman of the Homeland Security Committee. King and Democratic Sen. Charles Schumer (news, bio, voting record) of New York said they will introduce emergency legislation to suspend the ports deal.

Another Democrat, Sen. Bob Menendez of New Jersey, urged his colleagues to force Bush to wield his veto, which Bush — in his sixth year in office — has never done. "We should really test the resolve of the president on this one because what we're really doing is securing the safety of our people."

McClellan dismissed any connection between the deal and David Sanborn of Virginia, a former senior DP World executive whom the White House appointed last month to be the new administrator of the Maritime Administration of the Transportation Department. Sanborn worked as DP World's director of operations for Europe and Latin America.

"My understanding is that he has assured us that he was not involved in the negotiations to purchase this British company," McClellan added.

"In terms of David Sanborn, he was nominated to run the Maritime Administration because of his experience and expertise," the spokesman said. Sanborn is a graduate of the U.S. Merchant Marine Academy. He is an operations professional.

Earlier, several lawmakers determined to capsize the pending sale said they would not be deterred by Bush's veto threat.

Sen. Joseph Biden (news, bio, voting record), D-Del., said the bipartisan opposition to the deal indicated "a lack of confidence in the administration" on both sides. "Sure, we have to link up with our Arab friends but ... we want to see and those in Congress want to know what ... safeguards are built in," Biden said on ABC's "Good Morning America."

Bush's veto threat sought to quiet a political storm that has united Republican governors and Senate Majority Leader Bill Frist of Tennessee with liberal Democrats, including New York Sens. Hillary Rodham Clinton and Schumer.

To assuage concerns, the administration disclosed some assurances it negotiated with Dubai Ports. It required mandatory participation in U.S. security programs to stop smuggling and detect illegal shipments of nuclear materials; roughly 33 other port companies participate in these voluntarily. The Coast Guard also said it was nearly finished inspecting Dubai Ports' facilities in the United States.

Frist said Tuesday, before Bush's comments, that he would introduce legislation to put the sale on hold if the White House did not delay the takeover. He said the deal raised "serious questions regarding the safety and security of our homeland.

House Speaker Dennis Hastert, R-Ill., asked the president for a moratorium on the sale until it could be studied further.

Lawmakers from both parties have noted that some of the Sept. 11 hijackers used the United Arab Emirates as an operational and financial base. In addition, critics contend the UAE was an important transfer point for shipments of smuggled nuclear components sent to Iran, North Korea and Libya by a Pakistani scientist.

2 comments
:

Port security is already the weakest link in the protection of the United States (see Stephen Flynn's article "The Neglected Home Front" in the Sept/Oct issue of Foreign Affairs). There's absolutely no reason to assume that it the UAE will no a better or worse job than the Brits are already doing. Secondly, as is made clear in the article cited in the post, port security does not depend in any meaningful way on the port operator. Rather, it is up to the specific Port Authority as well as the Department of Homeland Security. The opposition to the sale of the port is nothing more than fear-mongering and paranoia. But, that's what most of homeland security is about in the first place.

Also, note that the aforementioned Stephen Flynn, one of the foremost experts on homeland security, isn't worried about the UAE buying ownership of this port. See his comments in this article in Time: http://www.time.com/time/nation/printout/0,8816,1161466,00.html